Bill Gross Has This Diagram Permanently Affixed On His Whiteboard

"Almost permanently affixed on the whiteboard of PIMCO's Investment Committee boardroom is a series of concentric circles, resembling the rings of a giant redwood, although in this case exhibiting an expanding continuum of asset classes with the safest in the center and the riskiest on the outer circles," writes Gross.

"Safest in the core are Treasury bills and overnight repo, which then turn outwards towards riskier notes and bonds, and then again into credit space with corporate, high yield, commodities and equities amongst others on the extremities," he adds.

However, Gross notes that the message of this diagram is much more complex than it seems.

"Change the price of credit at the center and you change the price of assets at the outer extremities...In addition to the changing policy rate at the center, asset prices on the outer circles are dependent on investor expectations and the confidence in policymakers and the effectiveness of their policies. The center must have credibility, the center must "hold" or else the entire array of asset prices at the extremities is at risk."

That's pretty much the gist of Gross' note.

"If the center holds, if global central bankers can convince investors that their abnormal policies can recreate a semblance of the old normal economy, then risk assets at the outer edges of our circle will have higher future returns than otherwise," he continued. "As long as artificially low policy rates persist, then artificially high-priced risk assets are not necessarily mispriced. Low returning, yes, but mispriced? Not necessarily."

"If central bankers lose "cred," the center may not hold, markets may not outperform cash."

Read Gross' whole note at PIMCO.com.